F5: Upside in Even Small Bit of Security Market, Says Deutsche

By Tiernan Ray

Deutsche Bank’s Brian Modoff today reiterated a Buy rating on shares of F5 Networks (FFIV), and a $116 price target, writing that his “checks” of system integrators and resellers suggest “meaningful interest from several Big Banks in the U.S. and rest of world, for F5′s Web application security and DDOs mitigation solutions,” which could mean opportunity for the firm in network security, which is largely the domain of Check Point Software Technologies (CHKP), Juniper Networks (JNPR), Palo Alto Networks (PANW)and Cisco Systems (CSCO), among others.

Modoff thinks security can contribute to the company’s results even if it only gets a small share:

A key insight from our research on F5’s security opportunity is that, similar to Palo Alto Networks, F5 only needs modest low single-digit share in the +$6B security equipment market [Infonetics data], for “security” to be meaningful to F5’s CY13+ growth rate, and as a basis for multiple expansion in the stock.For instance, our research suggests that F5 is currently addressing around a $1.5B-2B TAM in the +$6B security equipment market. This is given the company’s focus on Application Security and Next-Gen Network Firewalls.Low double-digit million a quarter in sales of F5’s security solutions could be meaningful to F5’s near-term growth rate; given the mid $300M a quarter run-rate profile. Further, our channel conversations note positive trends in large enterprise customer acceptance of F5’s newly refreshed BIG-IP platforms – in particular, the mid-range 4200 series and the high-end 10200 series. Large enterprise and Web 2.0 customer adoption of F5’s refreshed BIG-IP portfolio could be a basis for directional re-acceleration in F5’s product revenues – given relatively modest +6% DB and consensus product revenue growth expectation for FY13.

Modoff notes F5 shares fetch 13 times his estimtae for $5.35 in net profit this fiscal year, and 11 times 2014′s estimate, which he thinks is too low given its like the multiple Cisco would get. But he thinks the bear argument will be proven wrong as F5′s growth re-accelerates.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.